Energy, Geo-politics & Money - 2023.11.14
In this roundup, we take a closer look at the latest opportunity to take a contrary position in the oil market, presented by OPEC’s most recent assessment of “market fundamentals”. OPEC says these are strong, to which the market responded with optimism, pushing oil prices up. EPM believes this is fundamentally wrong, for two reasons. First, OPEC tends to be overoptimistic regarding “market fundamentals”, and as a result, actual production usually comes in lower than the cartel’s forecast. Secondly, if OPEC believes fundamentals are strong, it should be expected to be looking at loosening its production cuts, not tightening them further. Put the two together and the result will be lower oil prices, not higher.
Furthermore, we look at:
Why Goldman Sachs continues to be optimistic regarding the outlook for oil, less optimistic than previously, but still too optimistic in the EPM view; and why the IEA is aligned with the EPM perspective, forecasting a structurally long oil market again as of first quarter 2024
The macroeconomic and geopolitical reasons why economic growth in Asia is expected to decline next year, to below the global average growth rate
The fundamentally different views and objectives of the US and China; and the US agreement with Indonesia on military collaboration; both of which will in the EPM opinion prevent the Biden – Xi meeting scheduled for Wednesday to deliver anything meaningful
China taking the lead in another key energy transition technology, wind energy, as it now produces wind turbines that are not only cheaper but also better than machines from European manufacturers
What happened to Tesla’s solar roof tiles, originally announced in 2016
The EU’s promise to make a "substantial" financial contribution to the new international fund addressing the destruction caused by climate change (unlike the US which is offering “millions” for the to-be $100 billion fund); and its discussion on tighter rules for methane emissions management
General Energy News
In the view of EPM, another opportunity to take a contrary position in the market has presented itself. The most recent earlier opportunity was the increase in oil prices based on the fear of a regional escalation in the Gaza War, where EPM explained why this was the wrong early October to enable you to position for profit in the market. Now, both Brent and WTI rose 0.4% on the back of an OPEC report that says market fundamentals are strong, writes Reuters. S&P Global has a summary of the OPEC report, which points to sturdy economic growth in the US and China, and slightly revised up its demand growth forecast for 2023 by 20,000 b/d to 2.46 million b/d. For the full-year 2023, OPEC estimated the call on its crude at 29.1 million b/d -- 600,000 b/d higher than in 2022 -- rising to 29.9 million b/d in 2024. EPM believes the market reaction to the OPEC analysis is the wrong direction for oil, for two reasons. First, OPEC tends to be overoptimistic regarding “market fundamentals”, and as a result, actuals usually come in lower than forecasted by the cartel. Secondly, if OPEC believes fundamentals are strong, it should be expected to be looking at loosening its production cuts, not tightening them further. Put the two together and the result will be lower oil prices, not higher.
According to Bloomberg, money managers are increasing bets that the next oil price move will be a decline. Short-only positions rose by more than 20,000 contracts to 95,756 in the week ended Nov. 7, according to Commodity Futures Trading Commission data. Shorts are now the highest since July. At the same time, hedge funds slashed wagers on rising prices for the sixth straight week.
Goldman Sachs expects "ongoing resilience" in oil demand in 2024 to drive a further strengthening of oil prices in 2024. Just not as much as it earlier anticipated. Rising supply from some producers has prompted the bank to trim its 2024 average Brent price forecast to $92 a barrel from $98 a barrel previously, writes Reuters. The EPM perspective is for a worsening macroeconomic environment in 2024, which we believe is already underway at present (just look at petrochemicals earnings reports). As such, we do not expect demand to surprise on the positive side, and thus see little room for oil prices to go significantly higher than the current $75 – $85 range (absent and unpredictable shock).
The IEA sees things similar to EPM. According to the Financial Times, it believes the oil market will return to surplus in early 2024, as slowing economic growth and fast rising supply slow or reverse the large draw in stockpiles of oil since the summer. “If Saudi Arabia were to stick with its cut through the first quarter, our balances suggest the market could still be in a slight surplus,” the IEA said.
The US-led price cap on Russia’s oil sales is being almost completely circumvented, writes the Financial Times. Almost none of the shipments of seaborne crude in October were executed below the $60-a-barrel limit that the G7 and its allies have attempted to impose, data analysis shows. Western officials say they remain committed to the price cap, even as they acknowledge few barrels still trade below it. “The latest data makes the case that we’re going to have to toughen up . . . there’s absolutely no appetite for letting Russia just keep doing this,” a EU official was quoted as saying.
Macroeconomics
Economic growth among Asia Pacific Economic Cooperation countries is expected to decline next year and remain below the global average as higher interest rates slow US growth, as China continues to struggle with its recovery and tensions between the two hamper trade, writes Reuters. The 21 Asia Pacific Economic Cooperation countries are expected to grow by on average 2.8% in 2024, from 3.3% in 2023; and 2.9% in 2025 and 2026; below the global average of 3.2% and 3.5-3.6% in the rest of the world.
Geopolitics
Nikkei looks at the Biden – Xi meeting scheduled for Wednesday. The two superpowers hold fundamentally different views on the future of their relationship, it says. Washington wants to erect "guardrails" to ensure competition between them does not veer into conflict. Beijing says it needs to know whether the US will welcome an economically stronger China. When the US and China talk about "managing" the relationship, they mean different things, one analyst notes. When the Chinese say that, what they really mean is they want the US to back off and give China space. For China “space” means, the ability to adjust elements of the global order established by the US. For the US this is unacceptable as its overarching objective is to preserve exactly that order, the way it.
Considering the above mentioned differing perspective, newly announced defense cooperation agreement between the US and Indonesia, as reported on by Bloomberg, will not support progress in the US – China dialogue. The military cooperation agreement is the latest in a series of pacts between the US and Asian nations in recent months. In August, the US struck a defense cooperation agreement with Papua New Guinea, and in September the president traveled to Vietnam to announce a new “comprehensive strategic partnership” deepening business ties. EPM asks, how does the US expect China to understand this agreement? The US knows full well that China looks at US diplomacy and thinks, “they speak kind words in our face but simultaneously work with put us in an economic and military stranglehold”. As such, one could even conclude from the US – Indonesia agreement, as it only confirms the Chinese perspective, that the US wants the meeting between Biden and Xi to fail!
Energy Transition & Technology News
Martin Brudermüller, the chairman of German chemicals giant BASF, said Chinese offshore wind turbines are not only cheaper, but also better than machines from European manufacturers, writes Recharge. “The Chinese are technically better than us, and they are also cheaper than us,” he told journalists in Berlin last week, the Frankfurter Allgemeine Sonntagszeitung reported. Brudermüller claimed he is in a position to judge as his company isn’t only building wind farms in Europe with European turbines, but also in China with Chinese machines. Brudermüller rejected the notion of price dumping and state subsidies being the main reasons for the increasing success of Chinese wind turbines. “Take a really close look at it on site. They have simply become good with their products,” he is quoted as saying.
Meanwhile, Orsted has withdrawn from another offshore wind project, this time in Norway, as the company grapples with big losses resulting from rising costs, writes Bloomberg. Orsted is at the center of a crisis for the offshore wind industry with companies struggling to fund large developments. Higher financing and component costs combined with increased competition have slowed the pace of renewable energy around the world, making it harder for developers and suppliers to make new projects profitable.
The Financial Times looks at Tesla’s solar roof tiles, originally announced in 2016. Tesla acquired Solarcity for $2.6bn in 2016. Marking the deal, a blog post on the Tesla website talked up the prospect of a rooftop solar panel “that looks better and is more durable than a normal roof, that can be easily customized to fit the unique needs of each house, and that will lower costs to the consumer.” Fast forward to today, and the technology has faded into the background. Not much is said any more about the status of the Solar Roof, nor Tesla’s solar efforts more generally. Neither “Solar” nor “Energy Generation” garnered a mention in the company’s Q3 2023 earnings call. The fundamental reason, FT speculates, is a combination of prioritization (cars over solar power as the prior are higher margin) and slower than anticipated innovation (with continued high costs for the solar roof tiles manufacturing and installation).
Climate Politics
The European Union will make a "substantial" financial contribution to a new international fund addressing the destruction caused by climate change, the EU's executive Commission said according to Reuters. "The Commissioner is ready to announce substantial financial contribution by the EU and its member states to the loss & damage fund at COP28 in the context of an ambitious outcome at COP28," the European Commission and the UAE's incoming COP28 president said in a joint statement, referring to EU Climate Commissioner Wopke Hoekstra. The EU did not specify the size of its planned contribution.
While the US offered “several million dollars” for the losses and damages fund, writes Bloomberg. Civil-society groups and activists in developing nations called Kerry’s pledge far from adequate —coming from the country responsible for so much of the greenhouse gases in the atmosphere today. With the US responsibility for about a quarter of historical greenhouse gas emissions, a fair share of loss-and-damage finance would mean the US should be providing $70 billion per year by 2030, one campaigner argues.
Also, negotiators from the EU parliament and member states are entering the final round of talks on rules cracking down on methane leaked into the atmosphere by the energy sector. The goal is to get a deal in place before the COP28 climate summit in Dubai later this month, writes Bloomberg. The proposed rules will require energy companies to regularly inspect infrastructure such as pipelines and oil wells to look for methane. Applying the rules to imports, would be a next step to be taken over the next decade. Industry is lobbying against the rules. Leak detection and repair thresholds being negotiated are equivalent to a fraction of a dairy cow’s methane emissions, it says, while other measures like quantifying emissions from sub-sea wells are unfeasible, according to the International Association of Oil & Gas Producers. Nareg Terzian, head of strategy and communications at the group, said
The EU Methane Regulation is at risk of being impossible to implement by the European oil and gas industry because of certain requirements that are disconnected from reality. Some requirements rely on technologies that do not exist. Others are entirely disproportionate.